FLP family partnerships do you keep em?

By: Martin M. Shenkman, CPA, MBA, JD

Should You Keep your Family Limited Partnership (FLP)?

Money Matters Radio – Estate Planning Checklist

By: Martin M. Shenkman, Esq.

Introduction/Overview: Lots of folks set up family limited partnerships, F-L-P or FLPs for short (pronounced “flip”), to save estate taxes, but with the exclusion perhaps sticking at $3.5 million exempting more than 99% of taxpayers from the estate tax, and discounts that generated the estate tax benefits seemingly on the way out the window, does it pay to keep that family partnership breathing?

Consider the following items?

√ Good Flip Bad Flip: If you followed the package directions and set up and operated your FLP the right way, don’t get rid of it so fast. However, if like many taxpayers you got pretty sloppy on the details of forming or operating your FLP, it never made sense to have, so there is probably no reason to keep it. Remember how Colonel Saunders said “We do chicken right!” Kentucky fried chicken motto should inspire your FLP motto, “We do FLPs right!”

√ Don’t Flip Out: If your FLP is by the book you probably should keep it because there’s lots of good benefits it can provide that have nothing to do with estate tax discounts:

Manage and invest assets better by aggregating various family accounts and enabling better investment management fees on the bigger pot of assets.

Control.

Asset protection from suits, claims, malpractice and divorce.

Possible state estate tax savings.

Possible income tax savings by shifting income to lower bracket family members. This had been the rage with FLPs before every tax adviser starting using them for discounts. Well, if the income tax rates are going to go up (perhaps waaaaay up) then these benefits will again become important (although the Kiddie tax which makes children as old as 23 pay tax at their parents tax rates takes some of the fun out of it).

Minimize probate costs.

√ Flip Out: If the costs to keep your FLP humming the right way are too great compared to the benefits then it might pay to dissolve it. Be careful, though. Dissolving your FLP ain’t so easy as pushing that Staples EASY button. There are so many tax twists that even Chubby Checkers would struggle to keep up. So before opting to terminate a family partnership, consult with an accountant who specializes in partnership taxation (a generalist might not suffice). Be especially careful if the partners want different assets distributed to them when the partnership winds up. This could trigger negative income tax consequences.

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